Friday, April 26, 2013

In
its recent decision in State Farm Fire
& Cas. Co. v. Anderson, 2013 U.S. Dist. LEXIS 57837 (S.D. Miss. Apr.
23, 2013), the United States District Court for the Southern District of
Mississippi had occasion to consider coverage for an alleged fraudulent real
estate scheme under a comprehensive condo policy containing business liability
coverage and directors and officers coverages

State
Farm insured the Harbor House
Property Owners Association, Inc., a condo development located in Diamondhead,
Mississippi.The Harbor House development
experienced significant property damage as a result of Hurricane Katrina.It was alleged that one of the Association
board of directors, Carl Joffe, used his board position to intentionally delay
rebuilding efforts after the hurricane so as to cause a number of property
owners to sell their properties to Mr. Joffe, or one of his associates.These properties were later resold to
Diamondhead Real Estate (“DRE”), a land developer.As a result of these sales, DRE was able to
appoint enough members to the Association board so as to take majority control
of the board.DRE, through these
individual board members and Joffe, thereafter engaged in efforts to have the development
rezoned for use as a casino.Although
these efforts ultimately were unsuccessful, the homeowners brought suit against
Mr. Joffe and various members of DRE that had been appointed to the Association
board.The suit sought money damages
from these individuals based on theories of they (1) committed oppressive
and/or fraudulent activity and breached their common law duty of loyalty and
fiduciary duty to the Association; (2) engaged in self-dealing; (3) served the
interests of DRE, rather than the Association and its members; (4) acted in bad
faith; (5) engaged in intentional misconduct and a knowing violation of the
Association's charter document; and (6) committed illegal, oppressive, and/or
fraudulent acts.

State
Farm’s policy contained a business liability coverage similar in nature to a
general liability policy.The policy
provided coverage for bodily injury or property damage resulting from an
occurrence.It also provided coverage
for personal or advertising injury resulting from an occurrence.The court readily agreed that the underlying
lawsuit contained no allegations of any such categories of harm resulting from
an occurrence.

The
policy’s directors and officers coverage insured the Association board for sums
it became “legally
obligated to pay as damages, because of ‘wrongful acts’ committed by an insured
solely in the conduct of their management responsibilities for the
Condominium/Association.”The policy,
however, contained an exclusion applicable to “any dishonest, fraudulent,
criminal or malicious act” as well as an exclusion applicable to “damages
arising out of any transaction of the insured from which the insured will gain
any personal profit or advantage which is not shared equitably by the
Condominium/Association members.”

Joffe and the other board
member defendants argued that coverage was triggered simply based on
allegations of breach of fiduciary duty and breach of duty of care, and that
the underlying complaint could be characterized as a negligence claim for which
State Farm had a duty to defend and indemnify.The court disagreed with the insureds’ characterizations, concluding
that the underlying complaint alleged illegal, oppressive and/or fraudulent
misconduct falling within the policy’s exclusions.As the court explained:

The
breaches alleged in the underlying case are not the sort of errors, omissions,
or negligent acts covered by Option DO. They fall squarely within the coverage
exclusions for "dishonest, fraudulent, criminal or malicious" acts,
and "damages arising out of any transaction of the insured from which the
insured will gain any personal profit or advantage which is not shared
equitably by the Condominium/Association members." Therefore, the optional
Directors and Officers Liability section does not provide coveragefor the conduct alleged in the underlying
case.

Tuesday, April 23, 2013

In
its recent decision in B&A Demolition
& Removal Inc. v. Markel Ins. Co., 2013 U.S. Dist. LEXIS 55946
(E.D.N.Y. Apr. 18, 2013), the United States District Court for the Eastern
District of New York had occasion to consider when an insurance policy is
considered “issued or delivered” for the purpose of the “notice prejudice” rule
set forth in New York Insurance Law §3420(a).

Markel
Insurance Company insured B&A Demolition & Removal, Inc., a New York
company, under a combined general liability and contractors pollution liability
policy for the period October 22, 2008 through October 22, 2009.In April 2009, B&A was sued for allegedly
having caused property damage to a neighboring building while performing
construction work on its own premises.B&A delayed giving notice to Markel for nearly seven months.Markel, as a result, denied coverage to
B&A based on its failure to have complied with the policy condition
requiring prompt written notice of claim or suit.

At
issue in the resulting coverage action was whether B&A’s policy was
governed by New York’s “no prejudice” rule, whereby an insurer need not
demonstrate prejudice in order to sustain a disclaimer of coverage based on an
insured’s delay in providing notice of claim or suit, or whether the policy was
governed by the “notice prejudice” standard set forth in New York Insurance Law
§3420(a), as amended by the New York legislature effective January 17,
2009.The amended §3420(a) states late
notice disclaimers will only be effective if the insurer has been prejudiced by
the insured’s delay in providing notice.Importantly, New York’s legislature stated that the changes to §3420(a)
only apply to policies “issued or delivered” on or after January 17, 2009, and
every court to have since considered the issue has agreed that the prejudice
standard set forth in §3420(a) does not apply retroactively to policies issued
or delivered prior to that date.

Notwithstanding
the October 22, 2008 effective date of the Markel policy, B&A argued that
the policy should not be considered “issued or delivered” prior to January 17,
2009 because of a purported delay in when the policy was actually delivered.This alleged delay involved the roles of the
retail and wholesale brokers in procuring the policy on behalf of B&A.There was no dispute that the Markel
underwriter transmitted a copy of the policy, via email, to the wholesale
broker, Gremesco, on December 1, 2008.The Gremesco employee responsible for the account testified that she
emailed a copy of the policy to the retail broker, Halland, on the same
day.Halland, however, claimed not to
have received the email because of an apparent technical problem with its email
server.Halland further contended that
it did not have actual receipt of a copy of the policy until sometime in
February 2009 after having asked Gremesco to resend it.B&A contended that as a result of this
delay, the policy could not be considered delivered until after January 17,
2009, and that as such, the policy was necessarily governed by the new late
notice rule.

Markel
initially moved to dismiss B&A’s complaint, arguing that certain documents
referenced in the pleading established that the policy was at the very least
issued prior to January 17, 2009.The
court denied Markel’s motion on the basis that the documents were not properly
considered on motion to dismiss.In dictum, however, the court noted that
even if Markel could demonstrate that the policy was issued prior to January
17, 2009, it would still need to establish that delivery did not take place
after this date.

Following
discovery, Markel moved for summary judgment on the basis that the policy was,
in fact, delivered prior to January 17, 2009, notwithstanding the apparent
question of fact as to when Halland received a copy of the policy from
Gremesco.Markel argued that because
Gremesco, as the wholesale broker, was B&A’s agent rather than Markel’s
agent, delivery should be considered effected when Markel transmitted a copy of
the policy to Gremesco in December 2008, since.In support of this argument, Markel cited to case law holding that
wholesale brokers are generally considered the insured’s agent, or sub-agent,
and that there was no evidence to support the contention that Gremesco was
Markel’s agent.Markel pointed out,
among other things, that Gremesco had no authority to bind policies, set
premiums, or even collect premiums on behalf of Markel.Markel further pointed to deposition
testimony from both the Halland and Gremesco employees evidencing the fact that
Halland used Gremesco to “tap into” the wholesale insurance market and that
Gremesco, in this role, acted as a mere intermediary between Halland and
Markel.

In
considering this issue, the court noted that an insurance broker typically will
typically be considered the agent of the insured rather than the insurer,
absent “exceptional circumstances” demonstrating an agency relationship between
the insurer and the broker.The court
concluded that based on the evidence before it, no such exceptional
circumstances were present.On the
contrary, the evidence demonstrated as a matter of law that Gremesco was
B&A’s agent rather than Markel’s.Having
concluded that Gremesco was B&A’s agent, the court agreed that the policy
was delivered on December 1, 2008, and thus governed by New York’s pre-January
17, 2009 “no prejudice” rule. As such,
and given B&A’s seven-month delay in giving notice of the underlying suit,
the court held that, as a matter of law, Markel’s denial of coverage based on
late notice was proper.

Friday, April 19, 2013

In
its recent decision in Certified
Restoration Drycleaning Network v. Fed. Ins. Co., 2013 U.S. Dist. LEXIS
54457 (E.D. Mich. Apr. 16, 2013), the United States District Court for the
Eastern District of Michigan had occasion to consider the application of a
breach of contract exclusion to a dispute arising out of an alleged breach of a
franchise agreement.

The
insured, CRDN, franchised textile and dry cleaning systems throughout North
America.In 2007, it entered into an
agreement with East Coast Garment Restoration, pursuant to which East Coast was
required to pay a $11,000 franchise fee.A year later, however, CRDN terminated the franchise relationship on the
basis of information it learned from a background check of East Coast’s
principal.East Coast thereafter brought
suit, and later an arbitration proceeding, against CRDN, alleging causes of
action for breach of contract and breach of duty of good faith and fair
dealing.

Federal
Insurance Company insured CRDN under a combined directors and officers,
employment liability, fiduciary liability and insured organization coverage
policy.Federal’s policy obligated it to
defend CRDN in connection with claims for wrongful acts.The policy, however, contained an exclusion
barring coverage for claims:

… based upon, or arising from, or in consequence of any actual
or alleged liability of an Insured Organization under any written or oral
contract or agreement, provided that this Exclusion … shall not apply to the
extent that an Insured Organization would have been liable in the absence of
the contract or agreement.

Federal
denied coverage on the basis of this exclusion, contending that East Coast’s
claim against CRDN arose solely out of the franchise agreement and CRDN’s
alleged breach of this agreement.CRDN,
however, argued that notwithstanding the stated causes of action, certain
assertions in the underlying proceeding could be interpreted as alleging
misrepresentations made prior to the time that East Coast and CRDN entered into
the franchise agreement.CRDN also
argued that there was no contractual relationship between it and East Coast.

While
the court agreed that under Michigan law, it is not the “nomenclature” of the
underlying claim, but instead the cause of injury that determines a duty to
defend, the court agreed that East Coast’s claim arose wholly out of an alleged
breach of franchise agreement.Specifically,
the underlying complaint alleged in detail CRDN’s efforts to induce East Coast
to become a franchisee, the representations CRDN made concerning expected
earnings, and CRDN’s decision to terminate the franchise agreement.Further, the underlying complaint alleged
that CRDN’s decision to terminate the franchise agreement was not on a ground
permissible under the agreement.Given
these assertions, the court agreed that the exclusion applied, reasoning that
the East Coast’s claim arose out of CRDN’s alleged breach of the franchise
agreement, and that any references to “representations” were “a small part of
the background story,” and did not change the nature of the underlying
pleading.

In holding
that the exclusion applied to bar coverage, the court considered and rejected
CRDN’s argument that the exclusion did not apply because the underlying
settlement agreement between CRDN and East Coast made reference to CRDN having
made misrepresentations to East Coast.CRDN
argued that it was only upon drafting the settlement agreement that the parties
determined that the “true nature” of East Coast’s claim was for
misrepresentation rather than breach of contract.The court found this argument “not
realistic,” and that in any event, Federal’s duty to defend was determined
based only on the allegations in the complaint rather than the language of the
settlement agreement.

Monday, April 15, 2013

In the recent decision Kaiser Cement & Gypsum Corp. v.
Insurance Company of the State of Pennsylvania 2013 Cal. App. LEXIS 269 (2nd
Dist. April 8, 2013), the California Court of Appeal considered whether
horizontal or vertical exhaustion of insurance coverage was required in a
continuing damage case.The case was a
follow up to the earlier decision by the court in London Market Insurers v. Superior Court (2007) 146 Cal.App.648, in
which it held that “occurrence” in that case meant injurious exposure to
asbestos, so there was not a single annual occurrence as was urged by the
insurers.In Kaiser Cement, the court considered how to allocate the coverage
for the asbestos bodily injury claims.

In the period 1947 to
1987, four different primary insurers, including Truck Insurance Exchange, insured Kaiser.Truck covered Kaiser
from 1964 to 1983.Kaiser selected the
Truck policy for the year 1974 to be the primary policy which to provide Kaiser
with a defense in connection with underlying asbestos bodily injury claims because that policy had no deductible or
aggregate limit.ICSOP was the first
level excess insurer over the Truck policy's $500,000 per occurrence policy
limit.The appellate court addressed the
issue of which insurer(s) should pay for claims over the $500,000 policy limit.

Significantly, Truck’s
other primary policies had deductibles so, as the court noted, Kaiser’s share
of any loss potentially increased if there was allocation to other primary
policies rather than to the ICSOP excess insurance.ICSOP nevertheless urged requirement of horizontal
exhaustion of all primary policies before its own policy attached, both as a matter of California law and the specific language of the ICSOP policy , pursuant to which the policy limits of all primary policies triggered
by an occurrence had to exhaust before coverage was triggered.

The Kaiser Cement court agreed that ICSOP’s policy was excess of all
collectible primary insurance based on the policy’s definition of “retained
limit” being both the scheduled primary policy and “the applicable limits of
any other underlying insurance collectible by the Insured.”The court nevertheless concluded that Truck's primary policies, other than the 1974 policy,
were not collectible because the limits of liability clause in Truck's 1974 policy stated that $500,000 was the
limit of the company’s liability for each occurrence and also that “the limit
of the Company’s liability as respects any occurrence … shall not exceed the
per occurrence limit” set forth in the policy declarations, i.e., $500,000.The court read this language as an anti-stacking provision, meaning that Truck's 1974 policy was the sole policy that could be triggered by the underlying suits.

The appellate court
stated that its holding was consistent with the California Supreme Court’s
recent “all-sums-with-stacking” decision inState of California v. Continental
Ins. Co. (2012) 55 Cal.4th 186, because that decision specified
that insurers could avoid stacking of limits by including “’antistacking’”
provisions in their policies.The court held that Truck’s limit of liability language was just such an
antistacking provision.The court remanded
the matter to the trial court to determine if there were remaining limits in
the other primary carriers’ policies for the injury claims which exceeded
Truck’s $500,000 policy limit.

Friday, April 12, 2013

In
its recent decision in N.H. Ins. Co. v.
Hill, 2013 U.S. App. LEXIS 7204 (11th Cir. Apr. 10, 2013), the
United States Court of Appeals for the Eleventh Circuit, applying Florida law,
had occasion to consider whether an emotional distress claim arising out of an
alleged breach of contract qualified as a claim for bodily injury.

New Hampshire
insured Leisure Tyme, a seller of RVs, under a garage operations liability
policy.Leisure Tyme entered into a
series of deals with customers whereby the customers traded in their used RVs
toward the purchase price of new RVs.Leisure Tyme agreed to pay the customers’ loan balances on the traded in
RVs as part of this promotion.Leisure
Tyme, however, filed for bankruptcy before these loans could be fully
paid.The bankruptcy court lifted the
bankruptcy stay to allow the customers to sue Leisure Tyme to the extent of
available proceeds.New Hampshire
provided Leisure Tyme with a defense, but brought a declaratory judgment action
regarding its coverage obligations.

The
New Hampshire policy insured Leisure Tyme for bodily injury or property damage
caused by an accident and resulting from garage operations.New Hampshire argued that plaintiffs’ claims
for financial harm occasioned by Leisure Tyme’s failure to honor its loan
repayment commitments did not qualify as bodily injury, notwithstanding any financial
harm or emotional distress claimed by the plaintiffs.The court agreed, finding that under Florida
law, plaintiffs’ “complained of injuries, pecuniary loss and damage to credit
worthiness do not constitute physical injuries to their persons.”The court further stated that under Florida
law, the “impact rule” precluded coverage “for mental anguish-and any physical
manifestations of mental anguish” that were caused by Leisure Tyme’s breach of
contract.

In
addition to its holding with respect to the absence of bodily injury, the court
agreed that plaintiffs’ claims did not come within the policy’s coverage for
property damage; specifically as loss of use of property.The court concluded that even if plaintiffs
lost use of their traded-in RVs, those RVs were nevertheless in the care,
custody or control of Leisure Tyme, and thus excluded under the policy’s
coverage.The policy also contained a
breach of contract exclusion that the court held applicable to any property
damage claim.

Tuesday, April 9, 2013

In
its recent decision in Nautilus Ins. Co.
v. Roberts, 2013 U.S. Dist. LEXIS 50141 (E.D. Mo. Apr. 8, 2013), the United
States District Court for the Eastern District of Missouri had occasion to
consider the application of a liquor liability exclusion in a general liability
policy.

The
insured, American Legion, was named as a defendant in a dram shop liability
suit, alleging that it allowed a patron to become intoxicated.That patron was later involved in an auto
accident while driving under the influence, resulting in the death of one
individual and causing serious injuries to another.Nautilus, as the American Legion’s general
liability insurer, brought a coverage action against its insured and the
underlying claimants, seeking a declaration that it owed no coverage obligation
as a result of its policy exclusion applicable to:

Bodily injury" or "property damage" for which
any insured or his indemnitee may be held liable by reason of:

1) Causing
or contributing to the intoxication of any person;

2) The
furnishing of alcoholic beverages to a person under the legal drinking age or
under the influence of alcohol; or

3) Any
statute, ordinance, or regulation to the sale, gift, distribution or use of
alcoholic beverages.

Nautilus
later moved for summary judgment on the basis of this exclusion.American Legion defaulted in the suit, and
for reasons not clear, the underlying claimants failed to oppose the
motion.The court nevertheless
considered the merits of Nautilus’ motion, since as the insurer, Nautilus had
the burden of proving the application of the exclusion.Noting that claimants sought to hold
American Legion liable as a result of it having caused the intoxication of the
patron, the court agreed that the exclusion applied to all claims against
Nautilus’ insured.Further, at least one
prior Missouri court had held the exclusion applicable on similar facts.See,
Auto Owners (Mut.) Ins. Co. v. Sugar Creek Memorial Post. No. 3976, 123
S.W.3d (Mo. Ct. App. 2003).As such,
and given the absence of any meaningful opposition, the court granted summary
judgment in favor of Nautilus.

Tuesday, April 2, 2013

In
its recent decision in David Lerner
Assocs. v. Philadelphia Indem. Ins. Co., 2013 U.S. Dist. LEXIS 46333
(E.D.N.Y. Mar. 29, 2013), the United States District Court for the Eastern
District of New York had occasion to consider the application of a professional
services exclusion in a directors and officers policy.

Philadelphia
Indemnity Insurance Company insured David
Lerner Associates, Inc. (“DLA”) under a Private Company Protection Plus
Insurance Policy.During the policy
period, DLA was named as a defendant by FINRA in a disciplinary proceeding that
alleged DLA had sold shares in a REIT without performing adequate due diligence
and that DLA also misrepresented the value of the shares.The complaint also alleged that DLA targeted
its sales to senior citizens and/or unsophisticated investors.DLA was later named as a defendant in three
class actions relating to the same facts as alleged in the FINRA proceeding.

1. act,
error, omission, misstatement, misleading statement, neglect, or breach of duty
committed or attempted by an Individual Insured in his/her capacity as an
Individual Insured; or

2. act,
error, omission, misstatement, misleading statement, neglect, or breach of duty
committed or attempted by the Private Company; or

3. act,
error, omission, misstatement, misleading statement, neglect, or breach of duty
committed or attempted by an Individual Insured arising out of serving in
his/her capacity as director,officer,
governor or trustee of an Outside Entity if such service is at the written
request or direction of the Private Company.

The
policy, however, contained a professional services exclusion stating:

… the Underwriter shall not be liable to make any payment for
Loss in connection with any Claim made against the Insured based upon, arising
out of, directly or indirectly resulting from or in consequence of, or in any
way involving the Insured's performance of or failure to perform professional
services for others.

It is provided, however, that the foregoing shall not be
applicable to any derivative action or shareholder class action Claim alleging
failure to supervise those who performed or failed to perform such professional
services.

The
term “professional services” was not defined in the policy.

DLA denied
coverage to DLA on the basis of this exclusion, prompting DLA to bring a
declaratory judgment action.Philadelphia moved to dismiss the complaint on the basis of the
professional services exclusion, arguing that the allegations in the underlying
complaints pertained to DLA’s failure to identify “red flags” regarding the
REIT and that it failed to exercise due care and skill in providing information
to its investors.These allegations,
argued Philadelphia, necessarily pertained
to the provision, or lack thereof, of professional services under New York law.DLA, on the other hand, argued that because
the term “professional services” was not defined in the policy, it was an
ambiguous term that, at the very least, precluded dismissal under Fed.R.Civ.P.
12(b)(6).

In considering these
arguments, the court looked to the long line of New York decisions setting
forth the standard that whether one is engaged in a professional service
depends on whether that individual acted with a special degree of acumen and
training.The court further observed
that under New York law, the term “professional services” is not limited to
“traditional” professions such as lawyers, doctors, architects and
engineers.Against the backdrop of these
cases, the court concluded that underlying claims pertained to DLA’s
professional services:

… it is clear that the only reasonable interpretation of
"professional services" is that individuals engaged in the due
diligence and sale of financial products are engaged in professional services.
According to the underlying complaints, DLA was an underwriter for Apple REITs.
It was required to conduct due diligence
for these products, including performing financial analysis and meeting with
Apple REIT management. DLA then recommended and sold over $442 million of this
security. These actions, allegedly taken by DLA and individuals within the
company, fall squarely within a common-sense understanding of “professional
services.”

The
court further noted that case law from other jurisdictions, such as Minnesota
and Arizona, would require a similar determination.

In
reaching its conclusion, the court considered and rejected DLA’s argument that
it was merely performing ministerial tasks that did not rise to the level of
professional services, explaining that “performing a due diligence analysis and marketing financial
products requires specialized knowledge and training, and is not a rote
activity performed by a professional.”The court further rejected DLA’s assertion that discovery should be
allowed to proceed on the issue of whether it was performing professional services,
noting that the allegations in the underlying claims contained sufficiently
clear allegations from which to conclude the issue.